Investing.com -- HSBC on Monday upgraded European stocks to Overweight from Underweight and cut U.S. stocks to Neutral from Overweight, citing “shifting narratives” and a “game-changer” fiscal stimulus in the eurozone.
The revisions come amid a backdrop of global tariff concerns and a reassessment of the U.S.’s position in the world.
HSBC strategists highlight the U.S.’s wavering support for NATO and Ukraine as a catalyst for a "watershed moment" for Europe, and a substantial fiscal stimulus in Germany.
“It is important to stress that we are not turning negative on US equities – but tactically, we see better opportunities elsewhere for now,” said Alastair Pinder, head emerging markets (EM) and global equity strategist at HSBC.
The U.S. equity market has been under pressure recently, with the S&P 500 experiencing a 6.5% decline from its late February highs.
While U.S. equities remain fundamentally strong, with an 18% earnings per share (EPS) growth in Q4 2024, HSBC notes that the market has already factored in a "mini earnings recession" for the first half of 2025.
The bank suggests that slightly softer growth in the U.S. could be beneficial if it prompts a more accommodative Federal Reserve and lower bond yields.
HSBC also points to a more complex global tariff picture, where earnings resilience varies by region.
For example, a 10% tariff increase would significantly impact Mexico’s earnings, while China’s would see a minimal effect.
In Europe, the firm argues that equity exposure to the U.S. may be less than commonly believed, with sectors such as food & beverages, autos, and health care equipment being the most vulnerable to tariffs.
HSBC expects Germany’s incoming coalition to secure Bundestag approval for its fiscal stimulus measures, which could “help sustain European equities momentum and see a broadening of performance, particularly among German domestic-related stocks.”
“It also leaves the door open for other countries to follow. A good way to express this would be MDAX vs DAX and long defense stocks,” the report added.
Despite downgrading U.S. equities to neutral, HSBC remains optimistic about U.S. tech valuations, arguing that the underperformance of major tech companies has led to more compelling price-to-earnings ratios.
The bank believes that the medium- to long-term outlook for equities could turn more constructive if the tariff situation stabilizes and additional fiscal and deregulatory measures are introduced in the U.S.
Pinder concludes that while the path ahead may be volatile, particularly with numerous U.S. trade reviews and investigations due in early April, the recent fiscal developments in Europe and China’s increased fiscal support could signal a broader positive shift for global equities.